By: Daniel Gallagher, Senior Lead, Climate
- Recent geopolitical developments are reshaping investment and climate risk, through heightened policy uncertainty, energy insecurity and market volatility.
- Investors can manage downside risk by integrating geopolitics into forward-looking analysis and engaging with development finance and governments on how policy shapes risk.
The first quarter of 2026 has delivered profound geopolitical disruption.
The war in Iran has caused devastating impacts on communities in the region and contributed to global price volatility, and geopolitical tensions persist over global trade frictions and the war in Ukraine.
Taken together, these developments are increasingly seen by world leaders as part of a broader rupture in the post-WWII rules-based international order, with implications that include rising systemic risk and the reshaping of alliances.
And as UN Climate Chief Simon Stiell has warned, how governments act in this “new world disorder” will determine the trajectory of risks from climate change.
Geopolitics will influence future emissions from energy systems
While the global build out of clean energy has seen years of record investment, fossil fuels remain deeply embedded in energy systems. Existing laws, policies and production plans are leading to fossil fuel supply levels that, under globally recognised scenarios, could drive damaging climate outcomes. From an investment perspective, this misalignment contributes to the under‑pricing of long‑term risks and increases the likelihood of abrupt repricing as policy, technology or physical impacts evolve.
Following the start of the Iran conflict, the IEA warned that the closure of the Strait of Hormuz had created the largest supply disruption in the history of the global oil market. Since then, at least 60 governments have taken emergency measures to ration energy or seek alternative supply as they prepare for a long-lasting crisis.
While some countries, notably in Asia, may extend coal power in the short term, many are examining the energy security benefits of a faster transition to clean power where conditions allow for reduced dependency on volatile hydrocarbons. Europe’s investment in renewables since Russia’s invasion of Ukraine in 2022, notably, has already helped the region to cushion the impact of the 2026 gas price shock.
As countries shape their policy responses to the ongoing crisis, some are joining forces in new ways. For example, the First Conference on Transitioning Away from Fossil Fuels – organised by Colombia and the Netherlands – marks the start of an effort by 45 countries to advance oil, gas and coal phaseout plans. In a time of strain on multilateralism, many governments are looking to the energy transition to overcome the economic and financial instability associated with dependency on fossil fuels.
Ways for investors to manage risks
How investors respond to this period of geopolitical and climate uncertainty will shape their exposure to risk across a range of plausible futures. In that context, investors may consider the following approaches to strengthen forward‑looking risk management.
1. Assessing climate risks under a broader set of plausible futures
Current geopolitical dynamics point to a wider range of plausible futures for energy systems and emissions than climate scenario analysis has typically examined.
These range from scenarios where energy security concerns accelerate investment in clean power, to those where conflict and fragmentation slow transition progress and prolong exposure to climate related risks. The challenge is not to predict which of these pathways will prevail, but to assess how risk exposures differ across them, including scenarios where risks materialise more gradually or emerge abruptly.
For investors looking to update forward-looking analysis, several approaches are being developed to analyse the interplay of geopolitical risk, energy security and climate system uncertainty. For example, The University of Exeter and Universities Superannuation Scheme’s (USS) No Time to Lose scenarios support investors in understanding the effects of geopolitical disruptions. The Inevitable Policy Response (IPR) Forecasting Consortium, meanwhile, offers a dynamic forecasting approach that can quantify the likely effect of near-term volatility on transition pathways.
2. Engaging with governments on how policy shapes risks from climate change
For several years, investors have highlighted to governments their concern that existing policy trajectories could lead to intolerable risks to portfolios and economic systems.
In an environment of heightened geopolitical tension, engagement with policy makers may become increasingly relevant as investors seek to understand how different policy trajectories – including delayed, fragmented or abrupt action – could affect asset values, capital costs and long‑term economic stability.
The expanding set of tools available to investors reflects a recognition that policy risk is a material component of portfolio risk that cannot be diversified away. PRI’s new technical guide, for instance, supports investors to engage on climate and related risks with the governments in whose debt they invest. Several forthcoming investor briefs on MyPRI, our signatory platform, will further support signatories in this work.
3. Engaging with the development finance architecture being shaped in 2026
In this more fragmented geopolitical environment, development finance frameworks and country-level investment platforms being implemented this year will play a critical role in determining whether emerging markets are able to transition to clean power or risk locking in high‑carbon development pathways. For long‑term investors, engaging with these processes can support a clearer understanding of how material financial risks could evolve in a range of different global and national transition pathways.
In the months ahead, PRI will support signatory engagement in several international processes to ensure their perspectives are heard, including on the road to COP31.
Investor influence in an uncertain world
Ongoing geopolitical shifts could reshape climate risks. Investors who bring that recognition into their analysis will be well positioned to manage downside risks while also supporting greater energy security and long-term investment conditions.
